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Debts and discharge

Consumer debt

In bankruptcy, consumer debt means debt incurred by an individual primarily for a personal, family or household purpose, as opposed to business needs. 1

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How it works

What counts is the purpose of the debt. The bankruptcy petition asks whether your debts are primarily consumer debts or primarily business debts, which the form describes as debts taken on to get money for a business or investment or through running one. A filer whose debts are neither must say what kind they are. 2

A home loan can be a consumer debt: the reaffirmation rules speak of a consumer debt secured by real property, such as a home mortgage. 3

The label changes which rules apply. The Chapter 7 abuse rule, the rule behind the means test, covers individuals whose debts are primarily consumer debts. A filer whose debts are not says so on a supplement to the Chapter 7 income form and checks the box saying there is no presumption of abuse. 4 5 6

It also matters for recent borrowing, because large consumer purchases of luxury goods from one creditor and cash advances shortly before filing are presumed nondischargeable, and for the Chapter 13 codebtor stay and redemption, which apply only to consumer debts. 7 8 9

Whether a person's debts are primarily consumer debts depends on the facts, especially when personal and business borrowing are mixed. That is a question for a bankruptcy lawyer.

Common questions

What is the difference between consumer debt and business debt?

The purpose. Consumer debt is incurred primarily for a personal, family or household purpose. The bankruptcy petition describes business debts as debts taken on to get money for a business or investment or through running one. 1 2

Is a mortgage a consumer debt?

It can be. The reaffirmation rules refer to a consumer debt secured by real property, such as a home mortgage. A loan on a business property is judged by its purpose like any other debt. 3 2

Is a car loan a consumer debt?

It depends on the purpose. A debt incurred primarily for a personal, family or household purpose is a consumer debt. 1

Related reading

Business debts and personal guarantees in bankruptcyCredit card and medical debt in bankruptcyAll bankruptcy terms

Sources

  1. 11 U.S. Code § 101(8) (Cornell LII)
  2. Official Form 101, Voluntary Petition for Individuals Filing for Bankruptcy (uscourts.gov)
  3. 11 U.S. Code § 524(c)(6), (m)(1) (Cornell LII)
  4. 11 U.S. Code § 707(b)(1) (Cornell LII)
  5. Glossary of Legal Terms (uscourts.gov)
  6. Official Form 122A-1Supp, Statement of Exemption from Presumption of Abuse Under § 707(b)(2) (uscourts.gov)
  7. 11 U.S. Code § 523(a)(2)(C) (Cornell LII)
  8. Chapter 13 - Bankruptcy Basics
  9. 11 U.S. Code § 722 (Cornell LII)

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